RBI hints at interest rate hike to check inflation

Rajan says broad based recovery won’t happen before fiscal-end.

Written by ENS Economic Bureau | New Delhi | Mumbai | Published: October 29, 2013 2:46 am

Reserve Bank of India Governor Raghuram Rajan has noted he has “the unenviable task of anchoring inflation expectations”,despite tepid growth and weak business confidence indicating that he proposes to hike interest rates on Tuesday.

The Governor’s comments are part of the Macroeconomic and Monetary Developments released by the RBI on Monday. Analysts agreed that Rajan is most likely to raise the rate at which banks borrow from the RBI — the repo rate — by at least 25 basis points from the current 7.5 per cent in his Second Quarter Review for FY14.

Higher interest rates make money costlier which helps inflation management. But to ease the pressure on banks,he is expected to simultaneously ease the marginal standing facility,their window for additional borrowing from the current 9 per cent.

Rajan argues that his strategy is to get to a lower inflation level. This can only happen if food prices come down. Without naming onions,the review argues that within food,it is the price of vegetables that holds the key to lower price along with how the government manages the supply chain for protein-rich products.

Rajan has also conceded that a broad based recovery of the economy will not happen before FY14-end. “On current reckoning,growth in 2013-14 is likely to stay at about the level of last year (5 per cent)”.

The document has argued that it is important to craft policy responses so that growth concerns are addressed in an environment of stable prices. Consumer inflation has averaged 9.5 per cent for the last six years and the headline wholesale price inflation has averaged 8.6 per cent during the last three years,the review points out.

“Such high inflation eroded real consumption,lowered savings,caused financial disintermediation,widened the current account gap and placed additional pressures for subsidised safety nets for the vulnerable population.”

Looking ahead,Rajan argues that a good monsoon should have a salutary effect on food inflation.


* RBI to keep liquidity under check and policy rate at reasonable level

* Monetary policy will focus on anchoring inflation expectations

* Growth to pick up in the second half of 2013-14

* CAD to moderate in second quarter of this financial year

* High capital expenditure and widening revenue deficit a risk to fiscal consolidation

* NSEL crisis exposes regulatory gaps prevailing in systemic


GDP forecast cut to 4.8% in FY14

Mumbai: Reserve Bank-sponsored professional forecasters have scaled down India’s growth projection to 4.8 per cent for the current fiscal from 5.7 per cent estimated earlier.

In its Macroeconomic and Monetary Developments Second Quarter Review 2013-14,the bank said the survey by professional forecasters outside the RBI indicated a slowdown in growth.

“The median growth forecast for 2013-14 was revised downwards to 4.8 per cent from 5.7 per cent in the previous round,which is lower than the growth of 5 per cent registered during 2012-13,” RBI said.

Various external agencies like the IMF and the World Bank have lowered their growth projections for India. Their estimates range between 4.3-5.9 per cent. pti

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